Arbitration Agreements: No Worse Than Other Contracts But No Better, Either

Arbitration clauses are very common. So are disputes about whether a dispute has to be arbitrated or instead can be heard in court. The Supreme Court has been dealing with the “arbitra­tion versus litigation” issue repeatedly over the last few years. A lot of recent Supreme Court case law is heavily pro-arbitration. Case law stresses that an agreement to arbitrate has to be enforced to at least the same extent as any other agreement—after all, a deal is a deal, so if the parties agreed to arbitrate, they should be required to arbitrate. But it’s clear that even that pro-arbitration tendency has its limits. A court can’t simply make up new rules, even if the new rule favors arbitration.

The Supreme Court decided Morgan v. Sundance, Inc. on May 23, 2022. Robyn Morgan had been an employee at one of the Taco Bell franchises Sundance owns. She commenced a collective action (similar to a class action) against Sundance in federal court, claiming that Sundance violated the Fair Labor Standards Act. She alleged that because Sundance did not want to pay overtime to employees working more than forty hours a week, it recor­ded the hours employees worked in the wrong week.

At first, Sundance did not argue the case should be arbitrated. Instead, it moved to dismiss the collective action. After the court denied the motion to dismiss, Sundance answered the complaint and asserted fourteen defenses—though it did not raise arbitration as a defense. Sundance then participated in a mediation that ultimately did not succeed in resolving the dispute with Morgan.

After the mediation failed—eight months into the case—Sundance decided it wanted to ar­bitrate after all, and asked the court to refer the dispute to arbitration. That request set the stage for the issue before the Supreme Court. At what point does someone who participates in a litigation lose the right to demand arbitration? Most lower courts held that a party who participates in litigation without moving to arbitrate has waived its right only if the failure to seek arbitration earlier somehow prejudices the other side. The general rule is that a party can waive a right simply by relinquishing or abandoning it. It is not necessary that anyone else be affected. But under this majority rule, arbitration is different: a party can waive arbitration by participating in court proceedings only if that participation prejudiced the opponent. The justification for this special rule was the federal policy favoring arbitration. To effectuate that policy, anything that promotes arbitration is a good thing, so these courts imposed a prejudice rule on top of the normal waiver rules.

Morgan insisted that Sundance had waived its right to arbitrate by participating in litigation for eight months. Sundance for its part insisted that it did not matter: Morgan was not prejudiced by whatever Sundance had done in court, so there could not have been a waiver.

The Supreme Court decided unanimously that waiver is the same for arbitration as it is for any other right: it can be waived whether or not someone else is prejudiced. So just as a person can waive any other right simply by relinquishing it knowingly, a litigant can waive the right to arbitrate just by relinquishing it knowingly. Federal policy does favor arbitration, but that does not mean courts can create additional requirements, such as a showing of prejudice. Therefore, Morgan would be able upon remand to argue that Sundance had waived its right to arbitrate, even though Morgan had not suffered any prejudice due to Sundance’s eight months in court.

Did Sundance in fact waive its right to arbitrate by filing an answer and going to media­tion? The Supreme Court did not rule on that issue. It referred the issue back to the lower court, noting that in the lower court, “the waiver inquiry would focus on Sundance’s conduct,” but not on any prejudice to Morgan.

The upshot is that agreements to arbitrate have to be treated just like other agreements—no worse, certainly, but no better, either. If they are valid they must be enforced, but if one side waives its rights, it can no longer seek to enforce the agreement—precisely the same as with any other contract.